Compaq signals Q1 results below expectations

Blaming fierce price competition in North American markets, Compaq Computer has issued a warning that its first-quarter 1998 financial results will fall short of expectations. Revenues for the quarter will be about equal to the $US4.8 billion reported in the same quarter last year, while earnings will roughly break-even. At least one analyst says Compaq's announcement is further evidence that PC makers last quarter pushed more computers into their distribution channels than they were able to sell in an effort to bolster sales figures.

Blaming fierce price competition in North American markets, Compaq Computer has issued a warning that its first-quarter 1998 financial results will fall short of expectations.

Revenues for the quarter will be about equal to the $US4.8 billion reported in the same quarter last year, while earnings will roughly break-even, the company said in a statement.

At least one analyst says Compaq's announcement is further evidence that PC makers last quarter pushed more computers into their distribution channels than they were able to sell in an effort to bolster sales figures.

Compaq's revenues for the previous quarter were about $7.3 billion, about 34% higher than the company expects to report in the first quarter of fiscal 1998. Earnings for the first quarter of 1997 were $387 million, or $1.36 per share.

"Middle management is sometimes motivated to push product into the channel to meet short term goals, and this has a tendency to damage longer term goals," says analyst Roger Kay of IDC, adding that Compaq's announcement should not be read as a signal that consumers are buying less PCs.

Compaq's distribution channels are currently "stuffed," meaning the company must reduce shipments this quarter, which in turn will bring in less revenues, Kay says.

The situation is compounded by the fact that PC makers including Hewlett-Packard, IBM and Compaq have been moving towards more efficient production models that stress low inventories and fast turnaround, he said.

Compaq is rumored to have more than a month's worth of product in its distribution channels, while an ideal turn rate would be about two weeks, Kay added.

Compaq acknowledged that it has more inventory in its distribution channels than is required to meet the goals of its streamlined distribution model. The company is implementing price reductions and promotions in this quarter and the next to reduce that inventory, Compaq said in a statement.

Kay says IBM is also rumored to have oversupplied its channels, and said he would not be surprised if IBM issued a similar financial warning in the coming weeks.

Compaq did not return calls seeking comment .

The news comes two days after Intel Corp. warned that its revenues would fall 10 percent short of expectations for the quarter. Several analysts yesterday said this is also a signal that PC makers need to cut back on production to keep their inventories down, and are thus ordering less components. [See "Jittery Wall Street Misread Intel's Revenue Warning, Analysts Say," March 5 ]

Compaq, in Houston, Texas, can be reached at +1-281-370-0670, or on the World Wide Web at http://www.compaq.com/.

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